FICO Announces the Release of FICO 9 To Raise Credit Scores For Millions of Americans. New Scoring Method Will Discredit Collections, Especially With Medical Collections on the Credit Report.
FOR IMMEDIATE RELEASE
Contact: Brittany Williams
Broadview Mortgage – Katella Branch
Orange, CA – Thursday, August 21st, 2014 – FICO, formerly known as the Fair Isaac Corporation announced on Thursday August 7th, 2014, that they plan to change the way that the FICO score is calculated, and will call it FICO 9. As a result, FICO 9 will help boost the credit scores of millions of Americans, which in turn should boost lending. The announcement included that records of collections bills will be disregarded if they have already been paid off or settled with the collection agency, and that unpaid medical bills will bear less weight than other unpaid bills that have gone into collections. By disregarding said items that have been paid off, a consumer’s credit score may leap up about 25 points, which may not necessarily be the difference between an approval or a denial on a loan, but it may give consumers access to better rates which will in turn save them money over time.
FICO scores range from 350 points to 850 points. These scores take into account the credit information included on the three major credit agencies, Equifax, Experian, and TransUnion. FICO uses various versions of their formula to calculate them specifically to car loans, credit cards, and other types of loans. Fox Business quoted FICO in stating that its scores are used in 90% of lending decisions.
The Wall Street Journal reported, there are 106.5 million American consumers with a collection on their credit report. Of that number, 9.4 million had no balance on their collections item. Under the new system of FICO scoring, those 9.4 million Americans will not be penalized for the collections item. As of July , about 64.3 million consumers in the United States had a medical collection on their credit report. WSJ obtained this information from credit reporting agency, Experian. Fox Business maintains, “health care bills are the most common type of debt in collection, representing about 38 percent of total debt collected, according to a survey by the collection industry group ACA international”.
There is some debate over whether this new scoring model is a good thing, or whether it is a reward to those that are not financially responsible. The Wall Street Journal quoted, “the changes are expected to boost consumer lending especially among borrowers shut out of the market or charged high interest rates because of their low scores”, and then had Nessa Feddis, senior vice president of consumer protection and payments at the American Banker’s Association, a trade group, finish that thought stating, “it expands banks’ ability to make loans for people who might not have qualified and to offer a lower price [for others]”. Critics of the new FICO scoring method believe that it facilitates borrowers to go into debt, as they are simply not financially responsible, but the FICO score would tell banks otherwise. Also, if borrowers begin defaulting on their loans in the masses, lenders could suffer substantial loss, which is not healthy for the economy as a whole.
However, FICO is demonstrating that the current system in place is a fundamental issue. Fox Business notes the impact that these collections currently have on a consumer’s credit score; “in May  the Consumer Finance Protection Bureau released a study that found people with medical debts were over penalized on their credit scores, based on their overall debt payment record. For people with paid-off medical debts, the penalty amounted to credit scores 16 points to 22 points lower than people with similar repayment histories, the agency found”. This study shows that not only does a paid collection foster a non-level playing field to borrowers with similar credit behaviors, but it also breeds an atmosphere in which banks have even more of the advantage over borrowers by charging higher rates. On top of this, collections stay on credit reports for up to seven years, whether the borrower has paid off that balance and remained up to date on other debts or not. The Wall Street Journal contends, “On the current system, collections can impact credit scores as much as foreclosures and bankruptcies do. But the infractions are often small. Borrowers can be on time paying their debts, for example, but thrown by a medical emergency”.
One thing that humans loathe is morbidity. People don’t like to think in terms of “I am unhealthy” or “I might have to be rushed to the hospital this week”. They would rather think in terms of feeling good day to day, and therefore don’t plan as much for a medical emergency as for a financial emergency or a savings account cushion, and as a result it is not budgeted for, especially due to the confusion of “how much will the insurance company cover?” Consumers are for the most part unaware that their insurance company is not footing the bill, leaving them in default and collections without even knowing it. Sometimes the derogatory item can even be a result of a billing error. Medical facilities typically do not make much of an effort to send notifications to consumers to be aware that the bill has fallen into collections, thus leaving them unknowing until it’s too late.
Money Talks News brings up the point, “medical debt is often beyond the consumer’s control because, unlike unpaid rent or an unpaid utility bill, the consumer has no way of anticipating health care needs or medical bills, and as a result, medical debt may not accurately reflect a consumer’s typical payment practices”. Most other debts such as a mortgage, student loans, car loans, etc., require substantial planning, and lenders have the power of denying applicants. Medical visits can be unplanned, and hospitals are required to help someone with a medical emergency.
FICO is confident in the press that this is a great way to go about calculating credit. According to The Wall Street Journal, FICO ran studies to determine how likely borrowers are to repay their debts if they had great credit with the exception of collections. The New York Times notes,
“The new scoring approach came after FICO spoke with some of its largest customers, including major lending institutions, as well as regulators, who suggested that medical debt collections were unduly weighing on consumers’ scores. FICO said it then analyzed new data from the credit bureaus, and compared how consumer behavior varied depending on the type of collection debts on their credit reports…’We found that for someone where medical collections is their only derogatory, it is not as negative as a regular unpaid collection would be,’ said Anthony Sprauve, a FICO spokesman. ‘So we adjusted the algorithm’”.
The new credit score calculation is set to be available to lenders by the end of 2014. Whether many lenders will plan on using it is a whole other question. It is always up to lenders which scoring method they choose to use, so as a borrower, whether one has collections on their report or not, it is always a best practice to focus on the basics of what yields good credit and put those practices into action. This will maximize credit despite the method of scoring. It will be months before lenders end up picking up the scoring method if they do it at all. Lenders try out new scoring formulas on their portfolios to see how accurately the scores predict a ‘bad loan’. According to The New York Times, some lenders are still using old versions of credit scores because Fannie Mae and Freddie Mac use said scores in their underwriting software. When asked, “Fannie and Freddie did not say whether they had plans to switch to the updated FICO score that weighs medical collections less heavily. But they both said they were confident in the tools they use”.
Broadview Mortgage values the opportunity to educate consumers to understand which direction that their current or future mortgage is taking them in. If you have any questions about the information herein, feel free to reach out to the Author, Brittany Williams, at Brittany.firstname.lastname@example.org . If you would like a quick pre-approval click here, and for assistance with down payment or buyer assistance, click here. You are also always free to give us a call toll free at (855) 692-7623.
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